The SaaS memo most ERP vendors missed

Recently, a SaaS vendor executive asked whether his firm should adopt some aggressive revenue policies. Brian Sommer gave him earfuls about not doing it, but this executive wasn’t listening.

SaaS ERP vendors

SaaS ERP vendors- ERP vendors and pure-play SaaS vendors are genetically and fundamentally different. While the former like to tell us they’re now a SaaS business, most aren’t. Just as tigers can’t change their stripes, old-line ERP vendors don’t become real SaaS firms just because they say they are.

Ironically, some SaaS vendors aren’t great role models for the SaaS world either, as they choose to behave the way old ERP vendors do. It’s as if some SaaS vendors have both feet firmly stuck in the business practices, sales methods, adversarial customer behaviors, etc. of their old-school ERP predecessors.

In today’s market we have three kinds of firms:

Old school ERP firms that haven’t made much progress towards a true SaaS existence

SaaS firms that adopted too many bad business practices from old-school ERP vendors

Good SaaS companies, the smallest group of all

SaaS companies often adopt a slew of new business practices when they launch their businesses. The best of these SaaS firms recognize that an app that customers subscribe to (not license) requires a different mindset re: customer satisfaction and other focus areas.

The best SaaS firms are empathetic – they know that customers don’t want to pay for SaaS software until it is fully in production. They know that customers want low-friction contracts. They know customers want reasonable renewal terms. They know customers expect the kinds of continuous price reductions that Amazon brings through its scale. While many vendors of all kinds ‘know’ these things, few actually organize their SaaS offerings to deliver these outcomes. Actually, they often deliver the opposite result.

The old software economy metrics revolved around licenses, maintenance fees, audits, etc. Today, there are a ton of new metrics that SaaS vendors use to measure their effectiveness in managing their business. These new SaaS metrics (e.g., churn, monthly recurring revenue, etc.) indicate one critical element of what should occur with all SaaS apps: customers who don’t like the experience they are having will leave while customers who are getting value will stay.

The new SaaS business model should also be one of scale. With a simpler, consistent install base and technical platform, the vendors should be able to offer great economies of scale. Do they? No.

In the old ERP world, once a customer pays a (hefty) upfront perpetual license fee, an ERP vendor has the money whether customer uses the software or not. ERP vendors are used to a ‘no-give-backs’world. But in the SaaS world, vendors have to prove their continued value every single month. Or so the theory goes.

So, let’s imagine there’s an 8-point SaaS memo that ERP vendors should read prior to announcing their move to SaaS. What would it say?

SaaS is more than converting license revenue to a subscription basis

One core competency of ERP vendors is their ability to change their pricing almost daily. So, changing a bunch of license numbers to reflect a subscription price isn’t a big deal: it’s just a few more numbers on the price list. What is a big deal, though, is changing everything else that’s needed to become a real SaaS firm. SaaS is more than a billing or revenue recognition change. It requires new partners, new partner policing strategies, new methods of implementing solutions, new culture, new sales performance metrics, and, above all else, a new way of interacting with and delighting customers. Most ERP vendors only changed their billing method – and it shows!

SaaS vendors have to re-earn their business every month (ERP vendors think this doesn’t apply to them)

When you subscribe to a magazine and it no longer meets your fancy, you don’t renew it. Great SaaS software vendors get this point. Old ERP vendors think in terms of lock-in and don’t even try to create a permanently increasing value proposition for their customers. The adversarial nature of many ERP vendors towards their own customers is proof positive of this. You can’t be delighting your customers and re-earn their business if you like to litigate and audit them.

Re-earning the business every month is a major SaaS evolution. If you:

always delight your customers, every day and at every interaction

let customers scale up and down their software needs without financial penalties

don’t charge customers for applications they aren’t using

don’t charge customers until the applications have been implemented

make sure your firm and your implementation partners have a total customer satisfaction focus

put your customers’ interests ahead of your own

pay your sales team based on products implemented (not just sold)

etc.

then you might be on your way to re-earning your customer’s business.

ERP vendors don’t have a great track record for delighting customers. Strongarm sales tactics are often the norm. These tactics could include:

forcing customers to license unwanted/unnecessary cloud products just to make an audit issue go away

litigating customers over audits or indirect access issues

egregiously raising maintenance pricing or subscription renewal pricing (with no regard for the actual value the customer will get)

denying customers access to third party maintenance for licensed products

utilizing contracts that would take a small army of lawyers to comprehend (and then change the underlying URLs within them the very next week)

Tell the truth, have you ever met an old-school ERP vendor that wanted to change the above sales tactics?

Perhaps the ultimate customer un-friendly act by an application vendor is where a vendor uses an AI-tool to assess the degree with which a customer is ‘locked-into’ the vendor’s solution. The greater the lock-in, then the higher the renewal pricing will be. How can vendors earn the right to future subscription revenues when they abuse the relationship with a customer?

All of this is happening because of the short-term mindset of ERP (and many SaaS) vendors. Their salespeople will do whatever it takes to get the most money possible out of a customer now as it helps them make President’s Club, earn big commissions and, most importantly, keep their job. The salesperson’s bosses (e.g., Chief Revenue Officer, CEO, etc.) encourage this behavior as big numbers delight shareholders and Wall Street. But the problem with short-termism is that it doesn’t last forever. It might take a while but markets will shift away from these parasitic vendors when the opportunity is right.

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Article Credit: Diginomica

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